Housing crash: Is it time to buy low?

May 31, 2011

True confessions: I live in a bubble. Washington, D.C., the area I call home, appears to be one of the only two places in the country (the other being Seattle) where real estate is doing very well, thank you. So around me, I see home prices stable and rising, and houses getting sold within days of going on the market.

That’s not the case in most of the country, where home prices on average fell 0.8 percent in March, according to the S&P/Case Shiller survey released this morning. “Home prices continue on their downward spiral with no relief in sight,” David Blitzer of S&P, said in a statement. Home prices are at their lowest post-crash levels, with some areas retracing all the way back to 2002 levels.

And so, all morning analysts are saying things like “Maybe people just don’t want to own houses any more.” David Streitfeld of The New York Times wrote: “The desire to own your own home, long a bedrock of the American Dream, is fast becoming a casualty of the worst housing downturn since the Great Depression.”

And now two more disclaimers: I believe in homeownership and own two homes myself. And I think the most dangerous words in investing are: “This time it’s different.” I don’t think the desire to live in a home you own has disappeared from the nation’s psyche — it’s more likely that home prices grew to levels that were unaffordable for more and more people. Until there are more better-paying jobs, higher incomes and more family formations, housing may not recover.

So, I’m not going to say it’s time to run out and buy a house right now. But I do believe that “This time it’s the same” and the most enduring, useful and hard-to-follow financial advice is “Buy low and sell high.” And that the combination of home prices and interest rates are probably nearer their 21st century lows than their highs.

Most knowledgeable experts, and surveyed Americans, believe home prices could continue to decline or flatten and then bounce along the bottom for at least a couple of years, and possibly much longer. So if you’re thinking of flipping a condo for a quick profit, fuhgetaboudit. If you’re planning to relocate within five years, buying could be riskier than renting. But if you’re raising a family and renting, and have a solid job, you could look back on 2011-2012 as your greatest opportunity to buy your dream kitchen and fave family room.

Here are some things you can do with a home you own:

— Eventually actually own something. The great loss of home equity that started in 2006 and is still occurring is an anomaly. It is possible that houses will be worth less in 10, 20, and 30 years than they are now, but that’s highly, highly unlikely. In the meantime, you can pay off your mortgage and be done with monthly payments at some point in the future. When you buy a house, you buy a house. When you rent, you’re not buying anything.

— Paint it whatever color you’d like. And change the kitchen cabinets or put on a screened porch. That doesn’t just improve your quality of life, it adds to the value of your home. Renovations don’t get you all of your money back when you sell your home, but many of them get you most of your money back.

— Make some money. If you own your home, you can (1) rent out a room or a floor to pull in extra money; or (2) swap homes with people all over the world for rent-free vacations; or (3) go solar and sell power back to your energy company.

As for me and my personal disclosures, here is one more: If I had the cash, I’d be shopping for home number three right about now.

12 comments

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Posted by Housing crash: Is it time to buy low? – Reuters Blogs (blog) | Flipping Tips | Report as abusive

This may be the worst bounce we’ve seen, but what goes down will go up. I still believe that if you are in it for the long haul, real estate is a safe bet if you wish to accumulate wealth.

Posted by Marla | Report as abusive

Very good advice. Of course, no mention is made of HOAs, which can dictate home colors, various types of improvements, etc. I’m still chuckling over my HOA which demanded that I remove “my trailer” from the driveway of my home. Trailer belonged to my gardener who was working on the property at the time. He had been on the property for just one hour.

Posted by schmendric | Report as abusive

Many of us with funds to easily purchase a home are avoiding it for a very simple reason. Local municipalities are strapped for cash and are reassessing properties and taxing home owners exorbitantly. In NY G0v Cuomo has proposed a 2% annual cap on property taxes which is still higher than annual CD & bond rates. Owning a home is the same thing as paying rent directly to the government. At the same time govt services are facing significant cuts. Foreclosure issues are only the tip of the iceberg re home ownership problems in USA.

Posted by weaxxx | Report as abusive

Home ownership is problematic.

Apart from the Mortgage interest, the taxes when buying, the taxes while in it, the taxes when you sell, the maintenance, the thousands of dollars of tools and services that are part of home ownership one has no guarantee of Capital Gain.

Apart from that, the capital, interest and taxes, were they to have been invested, may very well have given one a head start to a cosy retirement.

Home ownership may very well be the most heavy indirectly taxed part of our lives.

Posted by Ray_d | Report as abusive

Don’t get cocky about your DC bubble. As soon as Congress starts hacking chunks out of the federal budget, DC will feel the pain everyone else is feeling.

Posted by DanG | Report as abusive

Catching a falling knife can hurt. With another recession in its early throws and the commodity / derivatives bubble to pop, it would be better to rethink a house purchase after the winter holidays. Ho. Ho.

Posted by SanPa | Report as abusive

Dear Linda,

I think there is a new story emerging which I believe might make for a new and potentially insightful article.

We understand the housing prices in most places are continuing to fall and may continue to do so well in the future. We are also aware of the tightening credit and income standards by banks for new mortgages. Its clear how both of these conditions are feeding on each other.

One thing that is being missed is how banks have limits on how small of a mortgage they are willing to offer because of how little they can make upfront and over the life of the loan. The funny thing is that more people would qualify for a loan based on their more stringent standards AND at the same time reduce the number of homes for sale in inventory. Right now I see a lot of home in my area that require an INVESTOR who can buy a house for cash.

I think there is a story in this. Please pass my tip along to someone who might investigate this further :-)

Posted by MrPisces | Report as abusive

There is still plenty of room for prices to fall. Right now it’s 50% off prices that were 200% up from what they are supposed to be. Wait and the prices will come down even more. Much more… Bubble had to burst at some point, and seems like it is happening now. Even the government subsidies can’t help this bubble at this point.

Posted by drizzt134 | Report as abusive

Bubbles don’t end until everyone is hurt, even in DC and Seattle(and even in Marin County CA).

Just wait a bit longer.

Posted by bobbobwhite | Report as abusive

To all the renters: Do you really think the landlord isn’t passing along tax increases, property upkeep, repairs, insurance, etc., on to you? Sure, you may have more free time because you don’t have to do those things yourself, but you are paying for it – one way or another…

Posted by D0ugR1ch | Report as abusive

I also have two houses. When the banks offered to refinance, I went “hey, free money!” So for my rental, hey, got all money I’ve invested in out, free house. Now with the crash, I can’t walk away without owing big to the gummint, can’t refinance to a lower interest rate because of increased equity requirements, Chase unilaterally cut my equityline on my residence and keep after me for a streamline of the 1st… and when I try to do that, they demand I pay down the equityline, and there’s no way to know if they even have the original paperwork (if I could prove they didn’t, they couldn’t make me pay). So screw ‘em all, I’ll just sit here for years in my ‘80s conspicuous consumption house, and blame the banks for trying to screw me and normalize my rate of return to a rental. No one really wants to help the middle class, republicans want to squeeze them out by giving all the money to the rich, lefties want to get rid of the tax advantages of homeownership. Teabaggers are even more stupid. So support Obama, he at least tries to be fair and rational, and we need nationalized health insurance for old sick people like me when we can’t work anymore and are too young for social security and transfer benefits don’t even cover utilities, taxes, repairs and insurance on a big old house. Yes, we should raise taxes for schools, too.

If I had any actual money, I’d be buying too. But not all the condo’s and crap advertised on tv, only sfr’s in decent areas. I could cash in some stocks, and will probably kick myself in a few years that I didn’t, just as I kicked myself when prices went up too fast before, wish I had just bitten the bullet and bought a couple early in the runup, though conservatism there seems smart at this point of retrospect. But over time, relatively conservative, moderately leveraged real estate is the second best investment, even though most people underestimate managerial costs. Stocks aren’t, because they conveniently ignore all the writeoffs (read: bankruptcy) over time, and the available leverage is pretty scary. What’s the best investment? A well run business, but trying to figure out what those are eventually normalizes to stock returns unless you are very directly involved. Most businesses fail, nearly everyone cannot evaluate risk rationally.

Yes, the gummint is making real estate ownership more difficult, especially if they really make passive owners do 1099’s (now there’s something worth writing an article about), strict underwriting and appraisal are necessary evils, going overboard just now. But encouraging homeownership through government programs is still a Good Thing.

Posted by effacebook | Report as abusive

The DC bubble burst can’t come too soon. I really want to move back.

Posted by PCScipio | Report as abusive

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